Tuesday, December 07, 2010 3:46 PM
All About Long Term Infrastructure Bonds
While presenting the Union Budget 2010 in the parliament on February 26, 2010, Finance Minister Pranab Mukherjee proposed the deduction in infusions in long-term infrastructure bonds in India of upto Rs 20, 000.
This came as the relief to the individual taxpayers in context of expenditure as well as saving. Prior to the Union Budget 2010 announcement, the inclusion of tax-free bonds was doubted by the industry analysts keeping in consideration the dipping finances of the state and dearth of foreign investment. The announcement not only surprised the common man but also the industry observers.
Investments benefits in Infrastructure Bonds
By investing in infrastructure bonds in India, an investor can save on taxes as provided under Section 88 of the Income Tax Act, 1961. The two significant economic factors playing vital role in the investment decisions in the infrastructure bonds are Inflation and interest rate movements. For instance, price of a bond will fall if interest rates rise and vice-versa.
Tax RateInvestments in Infrastructure
SlabTax SavingsReturns
After 3 yearsAfter 5 years
30%6,00031,29032,139
20%4,00027,48530,139
10%2,00025,48528,139
Obligatory Returns to defy Inflation Effect 25,19429,387
Tax RateTax fortified in lieu of investing in Infrastructure Bonds
SlabYields on investments from Market after Tax
After 3 yearsAfter 5 years
30%21,29228,159
20%24,33432,182
10%27,37636,204
How to invest in infrastructure bonds?
Infrastructure Bonds are available through issues of ICICI and IDBI, in the name of ICICI Safety Bonds and IDBI Flexibonds. They can reduce tax liability by upto Rs 16,000 per annum. Both the bonds provide investors the option of purchasing and holding the instruments either as physical certificates or in the demat form. The Tax-Saving Bond from ICICI for the month of July 2001 provides two options:
Face value of Rs 5,000 for 3 years at the rate of 9.00% interest payable annually.
Deep Discount Bonds with a face value of Rs 6,600. These bonds are available for Rs 5,000, and are issued for 3 years and 4 months, after which they are redeemed at their face value. These infrastructure bonds are suitable for an increase in the investment. The terms for the IDBI Bonds are similar too.
Apart from the above Infrastructure Bonds , Rural Electrification Corporation (REC) has come out with an issue of tax-saving infrastructure bonds for investors seeking to utilize the additional Rs 30,000 qualifying limit for investments in Infrastructure Bonds.
Points to remember before investing in infrastructure bonds
Infrastructure Bonds do not offer any protection against high inflation since the rate of interest they offer is pre-determined.
Against the pledging of the infrastructure Bonds with a bank, one can borrow money from banks. The amount depends on the market value of the bond and the credit quality of the instrument.
Moreover, it should be noted that although Infrastructure Bonds are considered to be safe, there is no assurance of getting the full investment back.